Pricing Tactics
How you price your products is a crucial business decision, but how you present those prices can be just as important. The right presentation can frame your offer in the best possible light, influencing customer perception and making them more likely to buy. In this blog we explore six pricing tactics you can use to communicate value and guide purchasing decisions.
1. Price Anchoring
The first price a customer sees (“The Price Anchor”) heavily influences their perception of every price that follows. It is the price against which all other options are judged to be either more affordable or more expensive.
Example: A restaurant may strategically place a very expensive item at the top of a menu section. Very few customers will order it, but its presence makes the other items on the menu appear well-priced in comparison.
How to use it: Always lead with your highest price product or service. By anchoring the customer to a higher price point, your other options will appear better value in comparison.
2. The Compromise Effect
When customers are presented with three options, they often feel anxious about choosing the cheapest (fearing low quality) or the most expensive (fearing overspending). This leads them to gravitate towards the middle ground as a safe "compromise" .
Example: A streaming service may offer a basic plan with adverts, a standard plan without adverts, and a premium plan with enhanced features. Most customers will see the middle choice (the standard plan without adverts) as the sensible, balanced option (and it’s often the one the business wants most people to select).
How to use it: Frame your target product as the middle option between a more basic version and a more advanced version. This makes it the most appealing choice for the majority of customers.
3. The Decoy Effect
The decoy effect is a way to present your target option as the obvious choice. The “Decoy” option is intentionally less attractive than the others. Its purpose isn't to be chosen, but to frame one of the other options as better value.
Example: A subscription may be offered as web-only, or web and print. Most customers chose web-only due to the much lower price point. Introducing a print only option (the “Decoy”) at a similar price to the web and print option, makes the latter appear much more valuable. With the decoy option, most customers chose the web and print option.
How to use it: Introduce a third option that has less benefits than your target option but at a similar in price. This will make your target option seem like the best value.
4. Charm Pricing
This is perhaps the most well-known pricing tactic. Our brains read from left to right, so we subconsciously anchor on the first digit we see. A price of £9.99 or £9.95 is perceived as being in the "£9 range" rather than the "£10 range," making it feel significantly cheaper. This is known as the "left-digit effect".
Example: Instead of selling a meal deal at £6, a retail business may sell at £5.99 or £5.95 to signal value. Charm pricing can also signal “discount”- for a premium brand a rounded number (e.g. £10) is often more effective at communicating quality.
How to use it: Decide what your price is communicating. If you want to signal value, use a price ending in .99 or .95. If you are a premium brand, use a rounded number.
5. Price Framing
The context surrounding a price can dramatically alter its perceived weight. By framing the price in a different light, you can make it feel much smaller and more manageable.
Example: A £360 annual fee may be presented as £30 per month or £1 per day (less than the price of a coffee). The price of a small home improvement project could be framed in reference to another one-time cost, e.g. for the cost of a family holiday you could improve your home and enjoy it every day for the next 20 years.
How to use it: When presenting a price, consider how you can frame it in terms of its daily, weekly, or monthly equivalent. Connect the cost to a common, everyday expense, or the value it provides over time.
6. The Endowment Effect
People place a much higher value on things they feel they already own, because we are more motivated to avoid loss than we are to pursue gain. We can leverage this by creating a temporary sense of ownership.
Example: by the time the price kicks in following a free trial, your are used to using the product or service and don’t want to lose it - it becomes a necessary purchase.
How to use it: Offer free trials, demos, or a generous return or money back policy, letting customers experience your product or service and integrate it into their lives.
By understanding and applying these tactics, you can present your prices in a way that communicates their value and makes the decision to purchase an easy one for your customers. Which of these tactics will you try in your business first?
